Thanks but no thanks: E Fund declines help on QDII debut

Dec 3, 2009

The Chinese fund houseÆs prospectus for its Asian equities product, slated for launch next week, indicates it will manage the fund without MOU partner State Street.

Guangzhou-based E Fund Management, the second-largest Chinese fund house in asset terms, is poised to launch its first QDII fund, by itself, rather than with a foreign sub-advisor.

The firm is set to launch an Asia-Pacific equities fund under China's qualified domestic institutional investor programme on Monday, December 7. Despite having signed a memorandum of understanding last year with State Street Global Advisors, E Fund will manage the portfolio itself.

The firm's investment management team is in Guangzhou but it also has an office in Hong Kong run by Zhang Xiaogang that is expected to play a role. Calls and e-mails to E Fund were not returned by press time.

Executives at investment firms in Hong Kong say Beijing-based Harvest Fund Management's acquisition of the Asian equities platform of DWS, the retail arm of Deutsche Asset Management, was the watershed event. This proved the determination of China's fund houses to manage their own overseas investment products.

ICBC Credit Suisse Fund Management has also decided to run its own QDII funds. E Fund is the first firm independent of any foreign partnership to do so.

Foreign executives downplay the notion that these moves are simply about fees, aware of cases such as China Southern Fund Management's decision to discontinue a sub-advisory agreement with BNY Mellon Asset Management, which was partly based on fees. Rather they reflect the ambition among Chinese firms to build international expertise in house.

"These fund-management companies have been supported by foreign advisors for 10 years, in some cases, and they've learned a lot," says one banking executive in Hong Kong.

A spokesperson at SSgA says the firm does not have a relationship with E Fund. The firm declined to discuss the terms in the MOU.

Peter Alexander, principal at Shanghai consultancy Z-Ben Advisors, says E Fund's move should not be interpreted as part of a wholesale trend. Although the biggest Chinese firms are keen to control their own products, the majority are probably not ready to follow suit.

Alexander says other QDII funds slated for launch early next year still look as though they will work with appointed foreign partners, including China Universal Fund Management (with Capital International) and Bosera Fund Management (with Singapore's Fullerton).

But global asset managers that have written confident reports to headquarters regarding the QDII sub-advisory opportunity set may need to review the space, particularly if E Fund's QDII product is rated a success, he warns.

The State Administration for Foreign Exchange has allocated $1 billion to the E Fund Enhanced Asia Pacific QDII Fund. Safe has also allocated QDII quota to Bosera, China Universal and China Merchants Fund Management, a joint venture involving ING Investment Management.

E Fund's primary distributor in China is ICBC, which suggests little difficulty in attracting assets. Its QDII product will also be cheaper than its peers, charging 1.5% versus the 1.85% that has been charged for other QDII funds. Although called an Asian equities fund, it actually has a 60% ceiling on stocks, with a minimum 40% in cash or bonds. The Hong Kong market is expected to play a big role in the portfolio.

The QDII launch comes on the heels of E Fund's successful launch of an exchange-traded fund, which raked in $2.8 billion last week. The firm was ranked 54th in AsianInvestor magazine's rankings of fund houses by assets sourced from Asia-Pacific clients (based on September figures; see our December edition); its recent exploits suggest it will have climbed a few more rungs.